How deleveraging drove the Great Depression

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mikek31's picture
mikek31
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Joined: May 3 2009
Posts: 15
How deleveraging drove the Great Depression

New from Australian economist Steve Keen's Debtwatch.  This may take a few reads, but it's important to understand.  Once the real economy begins to deflate in a highly leveraged system, there's really nothing that can be done to keep it from falling, barring complete destruction of the currency.

Chris Martenson has shown a graph in one of the Crash Course videos on how debt-to-GDP levels actually rose in the Great Depression even though total private debt fell in nominal terms.  That graph represents the economy falling away much faster than people can pay off their debts.  It's the result of deleveraging, and this is key to the situation we find ourselves in today.  What actually happens is that the more debt that gets paid off, the more indebted we become.  Sound crazy?  Well, it's really just the opposite of what's been happening over the last several years, "pulling forward" money through leverage.  This "pulling forward" is an expansion of credit, and your dollar has less purchasing power as a result.  In a "credit crunch", your dollar is worth more as prices fall.  However, in a massive contraction of credit like we have today, the value of currency rises at a faster rate than the rate at which we can liquidate debt.  Our debt burden becomes greater in real terms, even though our total debt falls in nominal terms.  Thus, it will only get increasingly more difficult to pay down debt as prices, wages, and employment continue to fall in a self-feeding loop.  Such is the cost of bringing an overly inflated and distorted fiat currency back in line with reality and having a proper value.

Economist Steve Keen explains this brilliantly, and the scary bit is when you see just how much this "leverage" has accounted for growth in GDP -- much more than Great Depression levels.  Arguably, never before in history have we been in such a precarious situation as we are globally today.

For all you hyperinflationists out there, I would also recommend reading Steve's The Roving Cavaliers of Credit on why any quantitative easing by central banks is so much poppy-cock when commercial banks refuse to lend.

My two cents: stay out of the markets.

JAG's picture
JAG
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Joined: Oct 26 2008
Posts: 2492
Re: How deleveraging drove the Great Depression

 Thanks Mike for the post. I'm a big fan of Professor Keen's work. Debt deflation is truly a nightmare scenario. Its no wonder the US Government/Fed is trying so hard to fight its onset. The question is can you really rely on such an incompetent Government to pull this off ? 

mikek31's picture
mikek31
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Joined: May 3 2009
Posts: 15
Re: How deleveraging drove the Great Depression

At this point, it looks like we're heading towards the Japanese experience, though with our levels of debt it could be called "the lost generation".  Justifying their actions through the guise of "economic recovery", the only real purpose of central banks and governments at this point is to hold the system together and avoid a liquidity crisis.  If people knew about the systemic fraud, embezzlement, racketeering, etc., there would've been a run on all paper assets last year and subsequent collapse of global currencies. 

William K. Black explained this widespread lawlessness and financial malfeasance in an excellent interview he did with Bill Moyers last month, found here.  What I took away from this, NWO conspiracies aside, is that the criminals in New York and Washington knew the consequences of their actions.  More importantly, they continue to ignore laws, as evidenced by yesterday's abrupt resignation of NY Fed Chairman Friedman on allegations of insider trading.

So not only do we try to solve the problem of too much debt with even more debt; too much government and regulation with even more government and regulation; but most importantly we also solve systemic lawlessness with even more law-breaking.  Can anyone say the Constitution?  H.R. 1207 to audit the Fed?  It's a start.

The bottom line is that if trust isn't restored through justice, no matter the economic system, then all we have is anarchy and the loss of freedom.

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: How deleveraging drove the Great Depression

Mike31 - good stuff, and I agree CM does the best job in explaining the debt/GDP relationship. 

I know Chris expanded on this important measure, I think it was in the "Martenson Reports" (Subscribers).  My take is that the contracting GDP (-6%+ 1st quarter) will be met with hefty government spending in an attempt to prop it up.  Another step in the downward spiral. 

Larry

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